Sometime after your tax time, you may get a letter from the Internal Revenue Service (IRS) stating there is a problem with your tax forms and taxes you paid—or failed to pay. The letter may also say that you have a tax penalty.
The good news is that you may have made a simple mistake when calculating your taxes or accidentally overlooked reporting something. Correcting the problem may be easy enough, possibly requiring only that you send a letter of explanation.
Other situations may demand other solutions, such as paying the penalty—or, at worst—jail time. It all depends on the problem and its reason.
Common Tax Problems the IRS Penalizes
There are many different tax problems that the IRS will penalize. Here are some of the 150 of them:- failing to file a return by the due date or failing to file the correct information;
- failing to pay all the taxes due at tax time;
- wrongly trying to claim credits or deductions or not reporting all your income;
- claiming a refund for an excessive amount which you are not entitled to;
- failing to deposit money for employment taxes;
- not paying estimated tax accurately;
- And more.
The Fresh Start Program
When some taxpayers need relief from the tax penalties, there is a way for some people to get a penalty abatement. Penalties can be eliminated if circumstances were beyond the taxpayer’s control at tax time. The program is called Fresh Start, and it enables some taxpayers to have their penalties waived. It is generally only given to first-time offenders, but only about 12 percent of those who may qualify for it will apply and receive it. Most people do not know the program exists.The program gives people and small businesses having difficulty paying their taxes an option to pay their taxes over time. People who regularly are filing taxes late or pay taxes late do not qualify for the program.
Qualifying for the Fresh Start Program
Qualifying for the program means only that the penalties are waived—but not the taxes owed. The IRS, according to Allison Soares, a tax attorney, gives four requirements. Candidates need to meet at least one of these requirements:- Your self-employment income dropped by 25 percent.
- You are single with less than $100,000 in income.
- You are married with less than $200,000 in income.
- You owe less than $50,000 in taxes.
Apply for Tax Penalty Abatement With a Reasonable Cause
When you ask for an IRS penalty abatement, you must have a reasonable cause. They will not accept any excuse. The following causes, according to SemperTax, are considered reasonable:- medical or financial hardship
- miscalculation of taxes
- a family member died
- tax preparer made a mistake or gave incorrect advice
- the IRS provided the wrong advice
Penalty Appeal Eligibility
If your application for penalty abatement gets rejected, you can appeal the rejection and ask the IRS to reconsider. The IRS says that your appeal must occur after sending a written request to remove the penalty and after receiving a letter officially refusing. Your request for an appeal must come under the reasonable cause criteria mentioned above.Offer-in-Compromise (OIC)
An alternative to a penalty abatement is to get an offer-in-compromise. This agreement with the IRS allows taxpayers to settle taxes owed for less than the total amount. If you have agreed to pay your taxes via an installment plan, you cannot apply for the OIC.A Hardship Situation
When applying for a hardship cause as the reason you need a penalty abatement, you can use IRS Form 843. You may also use a good cover letter that discusses the issues in Form 843. It is necessary to prove that there was a reason for your tardiness in filing or paying your taxes.Proof of the problem also must be submitted to the IRS when you apply for the tax abatement. For a medical hardship, you want to include a doctor’s diagnosis, hospital stays, prescriptions, etc. If you claim financial hardship, you should include documents such as eviction or foreclosure notices, bank overdrafts, repossessions, unemployment, layoffs, etc.
The Time Frame
If you are filing for a penalty abatement for a reasonable cause there are two ways to go. If your tax penalty is less than $500, HRBlock says that if you call the IRS, you may be able to get an instant answer. If more information is needed, they will likely ask you to send a Form 843 or a letter. Once you write the letter, however, you can expect to get an answer in three to four months.If your problem is a first-time abatement and you call them, you could get an instant answer. If the IRS agrees, they will remove the penalties and send a letter confirming it. If you write a letter or send Form 843 for a first-time abatement, it will take two to three months to get an answer.
Remember that most people who qualify for a penalty abatement do not get it simply because they do not apply. If you have a reasonable cause behind the difficulty, send your explanation to the IRS—with documentation—and enjoy the relief.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
